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Market access and market contestability: notes on trade and investment rules Vivianne Ventura-Dias1

1.

Introduction

Flows of goods, capital and information in their multiple forms, technology embodied in machines, parts and equipment, as well as in men and women crossing back and forth national frontiers, are integrating nations into an interdependent global economy. In this economic landscape, location decisions of the firms make trade and investment clearly interwoven. The interpretation of their relations is an open field of research. While still constituting a basic analytical starting point the traditional Hecksher-Ohlin-Samuelson model (with all extensions) has its explanatory power confined to specific patterns of trade specialisation (Helpman, 1998). International mobility of capital and labour with restricted inter-industry mobility; imperfect markets for products and factors; a significant share of intermediate products (including services) in trade flows; costly information; and the inseparability of buying and selling decisions completely subverted the basic assumptions of international trade theory. Increasingly, trade theorists recognise the importance of location decisions in determining the direction and composition of trade flows.2 Modern theories of the firm have been incorporated into the model of international trade to reconcile empirical facts with a theoretical framework that can be useful to policy-makers. 3 For a long time, international trade theory disregarded the complex process through which goods and services are commercialised and distributed, as well as the institutions that organise their production and trade (Helleiner, 1981:7).4 In real life, however, the co-ordination of economic transactions involves skills and knowledge that are scarce and that demand large financial rewards (Wood, 2001). The literature on transaction costs that grew out of the writings of Ronald Coase incorporated the costs of economic co-ordination as a critical determinant of the organisation of economic activity. 5 For most economists the basic questions raised by Coase concerning the nature and boundaries of the firm apply also to international economics. In other words, the study of trade and investment requires further inquiry on the reasons why some activities are carried out within hierarchical organisations whereas others are conducted through arms-length transactions (Krugman, 1995a). The direction of the causality between trade and investment is indeterminate: trade and investment can be complementary but also substitutes.6 For instance, merchandise exports will ultimately require some kind of

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Consultant (member of the Latin American Trade Network (LATN)). Bertil Ohlin was critical of the highly simplified factor proportion model and its unrealistic assumptions. He was concerned with the international effects of economies of scale, domestic institutions and legislation, and international factor movements (Ohlin, 1977). 3 This body of work has grown over the past 15 years. See Markusen and Maskus, 1999; Feenstra and Hanson, 2003. 4 In his pioneering study on intra-firm trade Helleiner (1981:5-8) added the nature of international markets as a missing dimension of the trade structure. By that, he meant the role of markets internal to international firms. He suggested that significant changes in the structure of trade were due to changes in the nature of international markets since a sizeable proportion of United States merchandise imports originated in a party related by ownership to the buyer. 5 See the section "An evolutionary approach to economic organization" in Dunning (1997/1999: 32-37). 6 The Report of the Working Group on the Relations between Trade and Investment to the General Council of the WTO claimed that it was irrelevant whether trade and investment are complementary or substitutes since trade and investment are simultaneously defined by location decisions of multinational enterprises (WTO, 1998). 2

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commercial presence by exporting enterprises in importing countries to be near consumers either to provide after-sale services, or to get a better grasp on local consumers' tastes. Likewise, a large domestic market may induce tariff-jumping investment that may reduce the level of trade. A firm can supply a foreign market with its product whether by exporting, or by producing locally. The basic question is under which circumstances will it choose to produce locally thereby becoming multinational. The theoretical and empirical consequences are not the same if trade and investment are complementary or substitutes. If trade and investment are perfect substitutes, the same results in terms of commodity prices, factor prices and welfare can be achieved either by trading goods or factors (Mundell, 1957, as quoted in Markusen and Maskus, 1999:3). The bulk of investment flows originates in large multinational corporations’ strategies (including the fantastic sums allocated to mergers and acquisitions). 7 The economic literature recognises that an outstanding feature of the current global interdependent economy is what Krugman (1995b) refers to as the process of "slicing up the value-added chain". 8 Location decisions of large multinational enterprises generate a web of trade arrangements with countries at different levels of economic and social development. Nevertheless, the implications of those location and re-location decisions for trade-creation, growth, and employment in individual countries are questions begging for further research. Hence, there is a wide space for subjective evaluations of the gains from investment promotion, protection and liberalisation. In particular, the nature and the distribution of the costs and benefits of investment promotion, protection and liberalisation for developing countries in the new context of international production and trade specialisation must be documented and assessed. The task is very complex since the current global interdependent economy generates contradictory movements of concentration and dispersion that make empirically difficult to estimate net gains. Further research is required on the distribution of the gains from global production and trade. Firstly, the gains in efficiency by individual firms are not automatically extended to home and host countries. Secondly, the gains from global production and trade are not equally shared by capital-exporting and capital-importing nations. The need for research is pressing since governments of small nations are pushed into bilateral, agreements with industrial countries aiming at greater trade and investment liberalisation. These notes are totally exploratory. I intend to contribute to the debate on asymmetrical bargaining between Latin American countries and industrial countries, namely, the United States, by discussing the new conditions of market access in the new context of trade cum investment. Latin American countries -as developing countries- are capital-importers and their exports are concentrated both in terms of products and geographic markets. Furthermore, Latin American trade specialisation corroborates the simple Hecksher-OhlinSamuelson (HOS) model of factor proportions. Abundant natural resources and unskilled labour explain individual countries' comparative advantages. These countries exchange resource-based and/or labour-intensive (processed and unprocessed) goods for machinery, parts and components (as embodied technology and capital 7

Cross border mergers and acquisitions are a large proportion of foreign direct investment flows (particularly among the advanced countries), with their value increasing from 52% of total FDI flows in 1987 to 83% in 1999 (UNCTAD, 2000 as in Navaretti, Haaland and Venables, 2002).

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services) with industrial countries. Latin American countries have been integrated into international production networks as providers of low-cost low-skilled labour. Hence, a bilateral bargaining between Latin American countries and industrial countries tends to be highly asymmetrical with an unbalanced treatment of trade and investment concessions. Trade concessions are associated with market access conditions whereas investment concessions are linked to market contestability conditions. The paper is organised as follows. Section 2 will discuss a few questions suggested by the new environment of production and trade in which location decisions by multinational enterprises define the ways and means of integration of labour abundant countries to the global economy. Section 3 discusses changes in the international regulation of trade and investment, as trade negotiations became openly mercantilist with their emphasis on fair trade. In parallel with slow progress in real market access issues, more attention was given to investment liberalisation and the protection of investors' rights. The concepts of property rights, contracts and enforcement of property rights are however socially defined. Section 4 concludes with some concerns raised by the relative importance of market access and market contestability for the development process.

2.

Trade cum investment: intra-firm trade and international outsourcing9

International production sharing: the questions Outsourcing in different modalities became a dominant feature of domestic and world production (Grossman and Helpman 2002). In fact, a significant part of multinational activity now takes the form of firms shifting a stage of their production process to low cost locations while sharing the production of goods and services with other industrial countries. Components are manufactured in different countries to be processed into intermediate or final goods in another location. The management of those operations is located in the home country but specialised corporate activities, such as accounting, information technology, can also be relocated to other nations. Multinational enterprises carry outsourcing operations both through their affiliates (intra-firm trade) as well as with independent firms through contractual relations. Consequently, a significant fraction of international transactions of goods and services involve co-ordinating mechanisms that go beyond pure market exchange. In other words, supply and demand decisions in world markets are closely related because they are taken either within the same corporation (pure hierarchy) or because of contractual obligations that tie suppliers to production specifications of large buyers. Production and trade specialisation in traditional trade models is based on the separability of exporting and importing decisions. Over the past century, two empirical facts challenged the basic doctrine of comparative advantage to explain international production and trade specialisation. On the one side, the predominance of manufactured goods in international trade, and on the other, the intensification of trade relations between industrial countries.10

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Krugman (1995b: 332) indicated that the "ability of producers to slice up the value chain, breaking a production process into many geographically separated steps" was truly a new aspect of modern world trade. 9 This section draws on Ventura-Dias, 2003. 10 The outstanding importance of manufactured goods in world trade is so extensively asserted that it is almost trivial to mention it. Manufactured goods accounted for more than 80% of the value of world exports in 2000. Nevertheless, in 1923 Alfred Marshall believed that the phenomenon would be

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Similarly, since the 1960s the trade literature has been concerned with the conceptual and empirical features of intra-industrial trade. The nature of trade flows between industrial and developing countries (North-South trade) remained inter-industrial, and fully compatible with standard trade theory. It was not until the 1970s that researchers began to estimate the share of intra-industrial trade in North-South trade. A more recent and fast growing literature is focused on the new characteristics of intra-industry manufacturing trade that resulted from global outsourcing by international firms. Although with distinct features cross-border production-sharing or global outsourcing by international firms, occurs in trade flows originating in or directed to industrial countries, both with other industrial countries and with developing countries.11 Several authors have studied the new structure of trade organised by international firms designating the phenomenon by different names. The abundance of papers combined with the lack of agreement on terminology show the attraction of international economists for the subject as well as the exploratory stage of the studies.12 The vertical disintegration of the production process, broadly defined to include ex-ante and ex-post assembly operations such as research and development, product design, marketing, distribution, and after-sales services, is a trend of the world economy of vast complexity. Production sharing or vertical specialisation can be defined to occur when: (i) goods are produced in multiple and sequential stages; (ii) two or more countries provide value-added in good’s production sequence; and (iii) at least one country must use imported inputs in its stage of the production process, and finally some of the output goods must be exported (Hummels Rapoport and Yi, 1998:81; Hummels, Ishii and Yi, 1999:3). Feenstra and Hanson (1999) suggested that the total amount of imported intermediate inputs could be estimated by multiplying the purchases of each type of input by the economy-wide import share for that input. Summing that amount over all inputs used within each industry, they found that imported inputs for United States manufacturing industries had increased from 6.5 per cent of total intermediate purchases in 1972 to 8.5 per cent in 1979, and 11.6 per cent in 1990. Hummels, Ishii and Yi (2001) focused their research on the use of imported inputs in producing goods that are exported. Using input-output tables from 10 OECD and four emerging market countries (Ireland, Korea, Mexico and Taiwan) they calculated that vertical specialisation accounted for 21 per cent of these countries' exports. For most of the OECD database countries and all four of the other countries, growth in vertical specialisation accounted for more than 30 per cent of export growth between 1970 and 1990. In Canada and the Netherlands, roughly 50 per cent of the growth of exports is accounted for growth in vertical specialisation. For Mexico between 1979 and 1994, and for Taiwan between 1961 and 1994, vertical specialisation growth accounted for more than 50 per cent of export growth. temporary and depended on the convergence of development pat terns in the world economy. A more balanced spread of technology and knowledge among countries should result reduce the size of trade in manufactures (Rayment, 1983:1). 11 Using 1974 data from United States of related-party imports, Helleiner (1981:32-35) showed that the relative importance of related-party trade was much greater in imports from other OECD members than in imports from developing countries. 12 Global production sharing (Feenstra and Hanson, 2001; Yeats, 1998; Ng and Yeats, 1999); co-production (Grunwald and Flamm, 1985); vertical specialisation (Hummels, Ishii and Yi, 1999; Yi, 1999; Knetter and Slaughter, 1999); outsourcing and disintegration of production (Feenstra, 1998; Feenstra and Hanson, 1996); 1996); fragmentation (Deardorff, 1998; 2000; Jones and Kierszkowski, 1997). Bhagwati and Dehejia (1994) employed the expression “kaleidoscope comparative advantage” to refer to the fast movement of enterprises to locate their international activities; Krugman (1995a)

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The assessment of the magnitude of production sharing in world trade is still based on scattered evidence and industry case studies because the measurement of the size of production sharing in trade flows faces severe empirical problems. The imported input content of exports or in other words, the foreign value-added embodied in exports is not readily available.13 Researchers also meet with the usual empirical difficulties of combining trade and production data and aggregation problems when trying to integrate classification systems that are not compatible.14 An additional difficulty is that trade statistics do not yield the information that is required to assess a country’s productive specialisation. As pointed out by Yeats (1998), trade data does not allow to perfectly discriminate between components and assembled products. The evidence so far indicates that the use of production sharing by enterprises varies with the industries. The use of imported intermediates tends to be high in assembly industries such as computers, electronics, aerospace; middle in motor vehicles and small in textiles and clothing (OECD, 1996). In particular, chemicals and machines account for much of the growth in the share of vertical specialisation in total trade (Hummels, Ishii and Yi, 2001). Using United States data, Navaretti et al. (2002) estimated that intra-firm trade of European Union and United States multinational firms accounted for 34% of European manufacturing imports from the United States. However, total trade in intermediate goods and the development of production networks was found to be even more important than intra-firm trade. The average share of trade in parts and components in total European Union manufacturing trade is approximately 15%, rising to 35% in 'networking' industries, those for which trade in parts and components can be distinguished from trade in finished products. Parts and components are especially important in North-North trade such as in intra European Union and European Union-United States trade. It accounts for 25% of European Union-United States manufacturing trade and for 45% of trade in 'networking' industries. Networking between the European Union and developing or transition areas is growing, especially with Central and Eastern European countries. Some of these countries have 30% of their exports to the European Union in 'networking' sectors. In industries like telecommunications, parts and components account for 90% of European Union exports and 65% of European Union imports (Navaretti et al., 2002). Feenstra and Hanson (2001) proposed to look at 'processing trade', which is defined by customs offices in the United States as the import of intermediate inputs for processing, and subsequent re-export of the final product. They found that between 1988 and 1998, processing exports grew from 12.4 to 97.2 billion in China, or from about one-third to over a half of total Chinese exports. Subsequently, they estimated that over the years 1997-2002 processing exports accounted for roughly 56% of Chinese exports (Feenstra and Hanson, 2003). In addition, Feenstra and Hanson (2001) indicated that between 1988 and 1994 processing imports from the United States into European Union countries had increased slightly from 18 per cent to 20 per cent of their total imports

preferred the phrase “slicing t he value chain”. Gereffi et al. (2001) referred to integrated production networks as global value chains (which are also called supply chains or global commodity chains). 13 Some of the measures that are constructed on the basis of coefficients estimated from input -output tables will face the normal problems in dealing with input -output data. Among others, the difficulties to construct time series indicators due to the availability of input -output tables for a limited number of years, and the reduced number of sectors for which the information on coefficients is available. See Hummels, Ishii and Yi, 1999, appendices I to III. 14 The number of sectors and subsectors in Standard International Uniform Classification (SITC) for trade data is greater than those in the Standard Industrial Classification (SIC).

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from the United States. This ratio, however, increased more significantly from 14 per cent to 24 per cent for countries such as Greece, Ireland, Portugal and Spain. In brief, there is empirical evidence that markets internal to multinational enterprises and trade in intermediate goods account for a significant part of trade flows. Using Feenstra (1998) expression, in specific industries, production is disintegrated into services, productive activities and intermediate goods, to be subsequently integrated by trade flows. Trade costs, economies of scale, scope and agglomeration determine location, de-location and re-location decisions by international firms. The extent to which investment rules can affect those variables is not clear. International production-sharing: Latin American experience Due to its proximity to the United States, early in the 1970s, Mexico was an exception in Latin America, because of the proportion of intra-industrial trade in Mexican trade with that country (Balassa, 1979). Other studies indicated that United States enterprises tended to present a high level of intra-industry trade with firms located in developing countries, mostly East Asian countries. The use of outsourcing was the result of public policies deliberately designed for benefiting United States enterprises with low-cost highly skilled manpower of Asian countries. After the Second World War the United States established fiscal programmes (the provisions 806.30 and 807.00 of the United States tariff code) that ended up promoting foreign assembly operations. 15 The detailed data that the United States collects on its outsourcing programme provide information on the different ways through which countries are incorporated in international production-sharing. Table 1 shows the share of United States imported inputs that will be further processed in the other country to be later re-exported to the United States. The first columns display the value of imports by the United States, from 1985 to 2000, from individual countries under the fiscal programme. The second set of columns indicate the total amount of United States inputs that were exported to the country to be processed, and the third column presents the share of these inputs (United States content) in total imports. In countries such as Belgium, Germany, Japan and Sweden, the United States content never exceeded 4.5 per cent, except in the United Kingdom case (7.7 per cent in the imports from Belgium in 1985). Nevertheless, as it could be expected, in developing countries’ production sharing imports the United States content exceeds 50 per cent on the average. Jamaica, Haiti, Dominican Republic, and Costa Rica present the highest proportion of United States inputs, or conversely the lowest share of domestic value -added. Mexico ranks in the middle with a persistent share of 53 per cent, whereas the Asian countries (Korea, Malaysia and Philippines) show an average share of roughly 48 per cent. Conversely, China displays coefficients similar to those of the United Kingdom. Brazil presents a low coefficient but it is not a significant importer under the United States tariff programme.

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In fact, the former provisions TSU 806.30 and 807.00 were created in 1953 when the House of Representatives decided to provide relief to manufacturers in the State of Michigan to use metal processing facilities in Ontario, Canada. The Senate Finance Committee expanded the eligibility to all other countries in the following year. See Grunwald and Flamm, 1985.

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The higher the proportion of imported inputs, the lower is the share of domestic value-added and the weaker is the linkage between the processing firms and the local economy. Therefore, the higher is the possibility that the assembling activities in the country assume the characteristics of an “enclave” activity. It should be remarked that the Chinese experience indicates that domestic institutional variables affect the creation of backward and forward linkages of assembling operations with the rest of the economy. Feenstra and Hanson (2003) examined the structure of ownership and control in Chinese processing plants and inputpurchasing regimes. Chinese control of the inputs (the import-and-assembly regime) combined with foreign ownership of the factory accounts for 49.6% of exports, and foreign control of the inputs combined with Chinese ownership of the factory accounts for 27.1% of processing exports.

Table 1 a

U.S. IMPORTS UNDER THE PRODUCTION-SHARING PROVISIONS OF HTS 9802 (1985, 1990, 1997, 1 999 AND 2000)

(In million of dollars and percentages) Countries

Total PS-Imports (A)

1985 Mexico 5537 Japan 10990 Germany 4657 Dom. Republic 247 Philippines 298 Malaysia 427 Korea 398 Honduras … Taiwan 518 China … United Kingdom 659 Belgium 143 Sweden 1143 El Salvador … Costa Rica 98 TOP 15 25115 countries

1990 12811 17107 5771 697 596 1351 2182 … 957 … 1435 445 1610 … 308

U.S. Content (B)

1997 1999 2000 1985 1990 1997 28883 25875 19430 2934 6387 15483 15667 15058 17851 133 582 548 8541 11172 9849 109 95 142 2669 2789 2727 177 483 1737 2063 2331 2099 141 259 1058 1911 2109 1639 217 578 930 1881 2002 1378 175 602 755 1380 1882 1890 … … 983 1248 1717 882 96 235 510 1319 1612 1242 … … 180 1665 1573 1870 71 167 124 1105 1455 1066 11 8 35 1433 1352 2080 37 49 15 912 1186 1315 … … 544 851 832 893 71 213 568

45270 71530 72945 66211 4171 9658 23611 23413 18803

16.6

22.7

33.0

32.1

28.4

1736

27.6

21.3

38.7

36.1

34.7

30115 75108 79167 78327 71220 5550 20809 26565 25358 20539

18.4

37.4

33.6

32.4

28.8

29838 All others Total

Share (B/A)

1999 2000 1985 1990 1997 1999 2000 13928 10271 53.0 49.9 53.6 53.8 52.9 576 543 1.2 3.4 3.5 3.8 3.0 156 137 2.3 1.6 1.7 1.4 1.4 1791 1700 71.6 69.3 65.1 64.2 62.3 1137 933 47.4 43.5 51.3 48.8 44.4 998 885 50.8 42.8 48.7 47.3 54.0 1042 753 44.1 27.6 40.2 52.0 54.6 1329 1300 … … 71.2 70.6 68.8 585 395 18.5 24.6 40.9 34.1 44.8 272 252 … … 13.6 16.9 20.3 251 213 10.7 11.6 7.4 15.9 11.4 37 28 7.7 … 3.2 2.5 2.6 60 42 3.2 3.0 1.0 4.5 2.0 704 774 … … 59.6 59.3 58.9 548 577 71.8 69.2 66.7 65.8 64.6

5000

b

11151 7636 5381

5009 1379

b

2954 1945

Source: Ventura-Dias, V. and J. Durán Lima, (2001), “Production Sharing in Latin American Trade: a research note”, ECLAC, Serie Comercio Internacional No. 22, Table 5, pp. 20. a b

Since 1997, data includes HTS 9802.00.60; 9802.00.80 and 9802.00.90 In 1990, Canada is the first leading country, with a PS value of US$. 23, 958 million, and US$. U.S. content of US$. 9,538 million.

Since the early 1980s, China has permitted foreign ownership of export processing plants. It determines that all processing plants (whether Chinese or foreign owned) operate according to one of two regimes: a pureassembly regime, in which a foreign buyer supplies a plant in China with inputs and hires the plant to process them into finished goods, all the while retaining ownership over the inputs; and an import-and-assembly regime, in which a plant in China imports inputs on its own accord, processes them, and sells the processed goods to a 7

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foreign buyer. The import-and-assembly regime is the more common form of export processing, accounting for 70.7% of processing exports over the 1997-2002 period (Feenstra and Hanson, 2003). There are several questions raised by the new pattern of trade specialisation. On the one hand, assembly operations require a better interpretation of trade data, since the presence of a given product in the exports of a country does not necessarily mean that the productive process is internalised in the country. Therefore, the spillover effects of improved resource allocation derived from trade may not materialise, because developing countries will be engaged in low-skill, low-value-added assembly stages of global production chains (Mayer et al., 2002). On the other hand, the development objective of moving resources from lower to higher productive activities may not be sustainable in the new economic landscape when the latter activities are temporarily based in the country through foot-loose types of investment. In global supply chains, foreign direct investment can be as volatile as short-term capital flows, since an enterprise can profit from low-cost labour with very little sunken investment in the host country. There are other implications for normative analysis of drastic changes in the relations between production and trade. First: in the simple trade model, although there is competition between alternative uses of domestic resources, there is no direct competition between resources of different nations due to the assumption of immobility of each nation’s productive factors ("trapped within a nation's borders", as in Jones, 1980). In real world, international enterprises have resources and information that enable them to benefit (albeit temporarily) from wage differentials. Second: it has been somewhat overlooked that since the basic "vent-for-surplus" model of Adam Smith, the determinants of the pattern of production have constituted the key factor for the understanding of trade patterns. Ultimately, the opportunity costs of buying and selling abroad are derived from the production-possibilities schedule in each trading country. When labour abundant countries are integrated into world supply chains through multinatio nals arbitrating differences in labour costs, the causality goes in the other direction. Exogenous trade and investment decisions determine the pattern of local production. 16 Finally, in the context of international production-sharing, specialisation is the result of comparative advantage within a narrow set of activities rather than in particular labour-intensive industries (Rayment, 1983; Feenstra, 1998; Knetter and Slaughter, 1999). These two propositions imply that a reduced domestic inter-industrial mobility of labour can become a considerable obstacle for converting trade into a machine of growth. As mentioned, exporting activities can behave as real enclaves without productive linkages to other sectors in the economy. Hence, more than accessing markets through investment liberalisation, governments should be more interested in guaranteeing that export-processing activities are integrated to the domestic economy. In other words, integration into the global economy should not lead to the disintegration of domestic economy (Sunkel, 19xx).

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Historically, the integration of developing countries into the world economy has always been based on external stimuli. It is hard to think of one single exporting industry that existed "in autarky". From plantations to mining, all export industries were established in developing countries with the purpose of producing for foreign markets.

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3.

From free-trade to free-market agreements: the international regulation of trade and investment

Historically, we can trace a parallel between the spread in the use of the term market access in the literature of trade and trade policy, and the growing importance of the firm in trade transactions. Market access was not an issue in trade negotiations from the still-born International Trade Organisation throughout the GATT (General Agreement on Tariffs and Trade) operations. The classic theory of international trade refers to international trade flows as the result of the decisions of several unrelated economic agents located in exporting and importing countries. Market access is absent in this literature. The literature refers to tariff and non-tariff barriers to merchandise trade flows, to the effects of those obstacles to trade on price and quantity of tradeables, but it is not concerned with the access of exported goods in importing countries. It was mostly at the end of the 1970s that the term market access began to be extensively used by United States authorities.17 In the 1980s, United States enterprises demanded the "right to contest" the Japanese market. Until then there is scanty reference to the term in the literature. The definition of market access includes necessarily a market share assigned to a firm. An enterprise has market access in one country if it can capture a share of market compatible with its size and the degree of competition that exists in that particular market (assuming the same conditions of price and quality for domestic and foreign goods) (Harris, 1989 264). Market access is an umbrella term for any problem a firm has in penetrating a market or expanding its market share there. 18 As quoted by Sauvé (1997:57), multinational corporations treat trade and investment as complementary means for carrying out comprehensive global production activities, rather than as alternative strategies for penetrating markets: "they view trade investment as flip sides of the same, market access, coin." (my stress) Actually, the notions of market access and market contestability were borrowed from industrial economics. 19 It is curious nevertheless, that in trade negotiations in the WTO (World Trade Organization), market access conditions comprise the traditional topics of barriers to the imports of goods (tariff and non-tariff measures).20 Economists employed the terms of "shallow" and "deep" integration to differentiate integration through trade from integration through trade and investment, and thereby rationalise the benefits derived from investment liberalisation through multilateral negotiations. These terms are descriptive but carry a judgement. The argument is that as nations become more deeply integrated through trade and investment, negotiations for greater market access should move beyond the protection established at the border by tariffs and administrative measures to 17

In 1981, the USTR (United States Trade Representative) defended his country's needs to launch unilateral and bilateral actions to achieve its objectives of a trading system more balanced and more fair: “…We will take into account the actions of other nations when they seek special privileges and special access to this market. I think that is something that needs to be understood and needs to be stated. I don’t know . how else to encourage other countries to participate as responsible members of the community. If people seek preferential access to our markets, then I think it is somewhat unbecoming of them to suggest that they should impose absolute and categorical barriers to the importation of our products.” Ambassador Brock in Jackson, John (1987/1989), “Multilateral a nd Bilateral Negotiating Approaches” in Stern, Robert (comp.), US Trade Policies in a Changing World Economy, The MIT Press, Cambridge, Massachussetts, p. 383. 18 See market access in Global Trade Negotiations Home Page (http://www.cid.harvard.edu/cidtrade/issues/marketaccess). Fair trade in the 19th century. 19 In the study of the competitive process, William Baumol, John C. Panzar and Robert D. Willig (1982) developed the theory of contestable markets, and defined the characteristics of market contestability.

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include policies, legislation and practices that affect the ability of individual firms to contest domestic markets. Unimpaired market access for foreign goods, services, ideas, investment, and business people (but not for unskilled labour) is emphasised as the basic component of a new trade policy in which trade and investment are complementary means of contesting markets.21 "Fair trade" rather than "free trade" provided the framework for demands of greater harmonisation of national rules and institutions aiming at deepening of market access.22 The emphasis on market access in trade negotiations is part of a general process, led by the United States, of demanding fair trade as opposed to free trade. Likewise, fair trade is tied to the rhetoric of level the playing field regardless of the characteristics of the players. In other words, of extending to all countries rules and institutions that had been adopted by a few. In the early 1980s, the United States formally introduced the topic of investment liberalisation in the GATT. Eventually, at the end of the Uruguay Round of multilateral trade negotiations, that led to the establishment of the WTO, the principles of the multilateral trading system were extended from merchandise trade to cover the "rights" of good and service providers. Several provisions were included in the Charter of WTO to limit the ability of WTO members to apply certain kinds of measures to attract investment or influence the operations of foreign investors. Investment-related disciplines were introduced in the General Agreeement on Trade in Services (GATS), the Agreement on Trade-Related Investment Measures (TRIMs), the Agreement on Subsidies and Countervailing Measures, and the Agreement on Trade-Related Aspects of Intellectual Property Rights (TRIPs). In general, the provisions include prohibition on some performance requirements, in particular, national content requirements. Bilateral and plurilateral "free trade" agreements with investment liberalisation and protection provisions expanded in parallel to failed attempts to harmonise international investment rules in the OECD (Organisation for Economic Co-operation and Development) and in the WTO. In parallel to multilateral negotiations that failed to create the Multilateral Investment Agreement at the OECD, all major investing countries engaged in the establishment and dissemination of Bilateral Investment Treaties (BITs).23 Investment protection agreements include restrictions on the ability of the state to expropriate and the obligation to compensate for expropriation. The purpose of BITs is to defend private property rights from discriminatory government action. Nevertheless, it was the issue of investor-to-State dispute settlement, included in all free trade agreements (FTAs) signed between several countries and the United States, that captured the attention of the great public. The provisions set by the chapter 11 of the North American Free Trade Agreement (NAFTA) subsumed the fears on the increased power of enterprises to challenge what would be legitimate government regulation, in the interest of preserving their profits.

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At the end of the Uruguay Round, the topics of five negotiating groups (tariffs, non-tariff measures, trade in tropical products, trade in manufactures based in natural resources, textiles and apparel, were added together in one single group denominat ed "market access". The tariff issues in agricultural negotiations are referred to as "market access" issues. 21 Several authors have called the attention to changes in the trade debate as fair trade considerations prevailed in United States trade policy, at first, and were later generalised to trade negotiations. See Bhagwati and Hudec, 1996; Ostry 1997. 22 See Ostry, 1997 for more references. 23 According to the WTO, by the end if 2002 there were 250 preferential trade arrangements (PTAs) as compared to just 40 in 1990 (Dee and Gali 2004)

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The literature on property rights diffused the importance of contracts and their stability as instruments to foster economic co-operation and market operation. Market and firm operations are governed by contracts. Proponents of greater protection of investors' rig hts argue that binding disciplines of capital-importing countries, such as those included in bilateral and plurilateral investment treaties, help in reducing uncertainty and, hence, result in more foreign direct investment in developing countries. It should be remarked that contracts as social institutions are evolutionary. The legal concept of contract is not static as expressed in the history of the United States legal system. Until the beginning of the 19th century, judges and juries constructed rules in which a contract should only be enforceable when the agreement was fair, just and reasonable. A doctrine of freedom of contract was later elaborated as the courts began to move away from traditional equitable doctrines of contract (Chase, 1997). Along the same lines, Sornarajah (2002) argues that the notion of property is not absolute. The vision of property that is expressed in investment treaties is partial and corresponds to a particular one that was developed in the United States over its history. Foreign investment cannot be protected for its own sake. Over the past two decades, there have been attempts to create an international regime for the protection of foreign direct investment that conflict with the competing notion that property must serve a social function and that individual rights are subject to the prior right of society to procure common goals. Sornarajah (2002:8) emphasised that the views on property evolve with the material development of the society. "The United States, itself, underwent a variety of views on property in working out the circumstances in which a state may take the property of the citizen without paying compensation. It finally reached a position in which the right of the state is constrained and becomes subject to the payment of just compensation only in more recent times, after having achieves its economic progress."

4.

Market access, market contestability and the development process

There is no empirical evidence that trade and investment liberalisation per se promotes global benefit and brings about development. There is not enough convincing empirical evidence on trade-creation effects of investment liberalisation, either. Only recently, a few researchers began to test on trade-creation effects of investment treaties (Dee and Gali, 2004). The incredible growth of Mexican exports is taken as an evidence of the benefits of investment liberalisation through NAFTA. Nevertheless, Mexican export processing operations (“maquilas”) began to expand before NAFTA was operational. 24 In the 1990s, Brazil, that had not ratified a single Bilateral Investment Treaty signed by Federal authorities, received as much foreign direct investment as Mexico. Pragmatic factors play an important role as determinants of foreign direct investment. Empirical research suggested that WTO negotiations on investment are neither sufficient nor necessary to induce higher foreign investment flows to developing countries (Nunnenkamp and Pant, 20039.

24

Anne Krugman claimed that it is impossible to disentangle the effects of the United States expansion, and of globalisation, from NAFTA effects on Mexican export growth (Krugman, 1998)

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Furthermore, the economic literature of the past 15 years has put emphasis on endogenous growth based on research and human capital. The welfare results from economic integration depend on the characteristics of products that are traded. Grossman and Helpman (1991) argued that there are cases in which trade liberalisation might decrease a country's long-run growth rate. As mentioned, for countries, such as in Latin America, relatively abundant in natural resources and unskilled labour, trade (through investment) will induce specialisation in activities that make intensive use of those resources, at the expense of human-capital intensive activities. Industrial output would grow faster if these countries were forced to devote more of their resources into upgrading human resources and developing new technologies of products and processes. Along the same lines, in the tradition of classical development economists, the "new" economic geography formalised by Paul Krugman (1991), stressed externalities and economies of agglomeration to explain why economic activities are unevenly distributed across space. The propensity of firms and workers to cluster together explains why trade integration may lead to the spatial concentration of increasing returns to scale industries in the core, while the periphery specialise in constant returns to scale industries (Martin, 1998: 760). The propensity to agglomerate will depend on the relative power of dispersal vis-à-vis agglomeration forces, of centrifugal vis-à-vis centripetal forces. International labour mobility, transport costs, and trade in intermediate inputs are some of the forces pushing towards agglomeration (Neary, 2001). Another caveat is suggested by Bhagwati and Panagariya (1996: 7) on the net benefits of FTAs. Even when trade creation effects are larger than trade diversion effects so that the FTA as a whole benefits, an individual member can lose due to the redistributive effects of discriminatory trade liberalisation. The degree of preferential access the country gives to the partner country as compared to the preferential access it receives from the latter will define the extent of the unfavourable redistributive effect on the member country. Therefore, when a country with a high degree of protection forms a FTA with a country with relatively open markets, as it happened in the NAFTA, with Mexico and the United States, Mexico may face a net welfare loss. The effects of asymmetries between countries become even more diffuse when regulatory measures are included in the negotiations between countries with institutional asymmetries, and greater convergence in institutions is required. Until the end of the 1990s, just three countries had signed FTAs with the United States (Canada, Israel, and Mexico). Since 2000, the current United States Administration has signed another eight FTAs: with Chile, a Central American Free Trade Agreement (CAFTA) with five Central American countries - Costa Rica, El Salvador, Guatemala, Honduras, and Nicaragua) and the Dominican Republic 25 , with Jordan and Singapore. The United States Trade Representative will be negotiating another 14 FTAs in 2004. 26 All these FTAs follow the NAFTA pattern of "free market agreements" in which countries commit to greater investment protection as well 25

CAFTA negotiations began in January 2003, and took place in nine rounds of negotiations. Agreement with El Salvador, Guatemala, Honduras and Nicaragua was reached on December 17, 2003. Costa Rica required more time in order to undertake further consultations at home. The final agreement with Costa Rica was reached on January 25, 2004.

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as to secure removal of impediments to investment in all forms. The standards accepted in these bilateral treaties included several investors´ rights that needed to be protected. The treaties sought to establish pre-entry rights of establishment, national and most favoured nation treatment, rights of repatriation of profits and full compensation in the event of expropriation. The arbitration of investment disputes with the host states enables a unilateral recourse by the foreign investor. The operation of investor-to-state settlement disputes (chapter 11) of NAFTA raised concerns that the mechanism does not balance sufficiently the interests of investors with those of host states.

26

The United States is negotiating with eight countries: Australia, Dominican Republic, Morocco and five southern African countries (Botswana, Lesotho, Namibia, South Africa and Swaziland. The United States has also announced its intention to begin negotiations with Bolivia, Colombia, Ecuador, Panama, and Peru, in South America, as well as with Bahrain and Thailand.

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